Associated Hospital Services, Inc. v. Commissioner

Chabot, J., concurring: I agree with the result and much of the analysis in the majority opinion. However, I would arrive at this result by holding that section 1.502-1(b), Income Tax Regs., is valid as a reasonable interpretation of the statute. I cannot join in the majority’s conclusion that this regulation is valid because of the reenactment doctrine.

The regulation appears to draw a line between (a) activities carried on within an exempt organization or carried on solely among related 1 exempt organizations and (b) activities carried on with others. And so the regulation treats as exempt an organization that furnishes electric power solely to its exempt parent for use in the parent’s exempt activities. On the other hand, the regulation treats as not exempt an organization operated primarily to furnish electric power to unrelated consumers (see n. 1 supra, for the regulation’s detailed definition of “related” for this purpose).

After drawing this line, the regulation analogizes the activities of a cooperative of unrelated member organizations to the activities of an organization dealing with unrelated consumers; the cooperative, then, would not be exempt merely because it provides services to its members which are otherwise unrelated entities.

This line-drawing is consistent with the focus of the 1950 legislation on interference with evenhanded competition. (See the description of the legislative history in University Hill Foundation v. Commissioner, 51 T.C. 548, 563-564 (1969), revd. 446 F.2d 701 (9th Cir. 1971).) The fourfold unsucessful efforts of the tax-exempt hospital industry to write into the statute an exemption for hospital laundry cooperatives is strong evidence that, indeed, the taxable hospital laundry industry fears the loss of business to tax-exempt cooperatives.

In view of (1) the various forms that cooperatives could take, (2) the question of whether a regional or nationwide cooperative with much advertising “muscle” should be treated the same as a purely local operation, (3) the varying degrees of competition that exist in different industries at different times and places, and (4) the question of whether a cooperative that shows consistent and accumulated profits should be treated the same as one that operates on a break-even basis, the regulation’s approach to cooperatives does not appear to be an unreasonable reading of the statute.

But for the regulation before us, the view taken by the dissenting members of the Court herein (and by a number of other courts, as noted by both the majority and the dissenters) might well prevail. However, “the issue before us is not how we might resolve the statutory ambiguity in the first instance, but whether there is any reasonable basis for the resolution embodied in the Commissioner’s Regulation.” Fulman v. United States, 434 U.S. 528, 536 (1978) (emphasis in original). I conclude that there is.

On this basis, I would uphold the regulation in question, and then apply the regulation to the facts before us to reach the same result that the majority reach. Fulman v. United States, supra; Bingler v. Johnson, 394 U.S. 741, 749-751 (1969); Friedman Foundation, Inc. v. Commissioner, 71 T.C. 40, 50 (1978).

The majority proceed by a different route. They note the many efforts by the exempt hospital industry to amend the Internal Revenue Code of 1954 to clearly provide section 501(c)(3) status for organizations such as petitioner, and stress the ultimate failure of all these efforts. From this, the majority conclude that the Congress ratified the regulation in question under the reenactment doctrine.

However, examination of the legislative history of each of these attempts shows that, although the Congress clearly was aware of respondent’s position on the issue, the Congress also took pains to describe it as merely respondent’s position and not as then-present law. Similarly, the Congress was cautious in describing what it enacted. The Conference Committee report on the 1968 enactment of section 501(e) (as part of the Revenue and Expenditure Control Act of 1968, Pub. L. 90-364, 82 Stat. 269, discussed at p. 221 in the majority opinion) clearly limits itself to stating that "the new subsection does not grant tax-exempt status” to laundry service cooperatives (emphasis supplied). The same careful limitations appear in the legislative history materials of the Tax Reform Act of 1976. See S. Rept. 94-938 (Part 2) 76-77 (1976), 1976-3 C.B. (Vol. 3) 643, 718-719; Joint Comm, on Internal Revenue Taxation, Description of Provisions Listed for Further Hearings by the Committee on Finance on July 20, 21, and 22, 1976, at p. 90 (Comm. Print July 19, 1976).

Since the Congress took such pains to avoid deciding what the law is as to organizations such as petitioner, it seems to me to be inappropriate for us to conclude that the Congress approved the regulation under the reenactment doctrine. It may be appropriate, however, to note that the result we reach — upholding the regulation in question — is consistent with the Congress’ 1968 and 1976 amendments to the Code. On the other hand, invalidation of the regulation would raise many questions about the effect of the careful restrictions the Congress wrote into sections 501(f), in 1974, and 512(e), in 1976, as well as those appearing in section 501(e).

Fay, J., agrees with this concurring opinion. Sec. 1.502-l(b), Income Tax Regs., provides in pertinent part:

For purposes of this paragraph, organizations are related only if they consist of—

(1) A parent organization and one or more of its subsidiary organizations; or

(2) Subsidiary organizations having a common parent organization.

An exempt organization is not related to another exempt organization merely because they both engage in the same type of exempt activities.